Tax Reduction

TAX REDUCTION….Noam Scheiber is enthusiastic about a tax proposal from Ted Halstead and Maya MacGuineas outlined in the Washington Post on Monday. The proposal itself is simple: eliminate the payroll tax for Social Security and Medicare and replace it with a consumption tax. The most common kind of consumption tax is a sales tax, but that’s not what they’re proposing:

A better alternative would be a progressive consumption tax, levied not on individual purchases but rather on total spending. Each year, taxpayers would calculate their total income, subtract their total savings and pay taxes on the difference. The first, say, $25,000 of consumption would be tax-free, and from there the tax rates would be progressive rather than flat. The more you spent and the less you saved, the higher your tax rate would be.

Noam describes this as “that rare proposal that’s sound in economic terms and politically.” To which I can only wonder if Noam has temporarily taken up residence on Mars.

Is this proposal economically sound? Sure. Would it raise enough money? Sure. Are conservatives traditionally in favor of consumption taxes? Sure. Are conservatives traditionally opposed to business taxes (half of all payroll taxes are paid by the employer)? Sure.

But now let’s return to planet Earth and ask: are conservatives traditionally in favor of proposals that reduce taxes on the poor and middle class and increase them on the rich ? which is exactly what this would do? Um, no, not exactly. Which means that this proposal is dead on arrival. It’s laughable to think it would get any support at all from the Republican party (and, sadly, it would probably also get less support than it deserves from the Democratic party).

The payroll tax is perhaps the worst tax in America. It’s bad for business, it’s savagely regressive, it discourages job creation, and at the moment it’s being used to subsidize George Bush’s massive deficits in the general fund. But it does have one saving grace: it’s barely noticable to the rich. Someone who makes a million dollars a year pays only about 2% of their income in payroll taxes.

There are hundreds of ways of funding Social Security and Medicare that would be superior to our current payroll tax. It’s not lack of ideas that prevents Congress from choosing one of them and eradicating the payroll tax once and for all, it’s the 11th commandment of modern Republicanism: thou shalt not raise taxes on the rich.

Ted Halstead, Maya MacGuineas, and Noam Scheiber surely all know this perfectly well. Why do they pretend not to?

POSTSCRIPT: On the other hand, I should make clear that I heartily endorse the idea of John Kerry making something like this a cornerstone of his campaign. He should take the high ground on tax relief for the poor and middle class and let Republicans run around in circles explaining why this would be a bad idea. That would be a show worth watching.